It is common for leaders in the nonprofit sector to perceive audits as a daunting or intimidating process, often overshadowed by the fear of making mistakes or not having the correct documentation. However, in this comprehensive guide, we aim to shift that perspective and demonstrate that audits can actually be a powerful tool for growth, bolstering credibility, and unlocking new funding opportunities.
Understanding the Need for an Audit in Nonprofits
- The need for an audit typically arises from three key factors:
- Your state’s regulations
- The requirements of your funders
Your organization’s spending of federal government money
Each state has distinct regulations concerning nonprofit audits, and many foundations and government agencies necessitate audited financials during the application process or as a condition for grant renewal.
An audit is certainly required if your nonprofit is spending over $750,000 in federal government money annually. The Council of Nonprofits offers a comprehensive list of state law nonprofit audit requirements, providing an invaluable resource to determine if your organization needs an audit.
Viewing Audits as Opportunities
Once it’s clear that an audit is necessary, changing how you view the process is crucial. Audits should not be seen as a dreaded challenge but rather as an invaluable learning opportunity.
Audits offer a chance to glean from the expertise of skilled CPAs who are well-versed with all the latest tax and accounting regulations for nonprofits. Their insights can then be applied within your organization, ensuring you adhere to best practices and regulatory standards.
The Benefits of an Audit
Embracing the audit process offers several benefits. Not only does it serve as a means of regulatory compliance, but it is also a best practice that promotes financial transparency. Audited financials bolster your organization’s credibility and instill confidence in your funders.
Moreover, having audited financials can unlock new and diverse funding opportunities. Many funders require audited financials as part of the application process, and having these at your disposal makes your organization eligible for such funding opportunities.
Charity watchdog organizations such as Charity Navigator and GuideStar consider audited financials a critical factor in their rating process. A high rating can boost your credibility among potential donors, giving your organization a competitive advantage.
Choosing the Right Auditor and Building Strong Relationships
Selecting the right auditor is a key part of this process. Recommendations and referrals from other nonprofits can be a helpful starting point, but working with a professional, licensed CPA firm specializing in nonprofits is crucial.
It’s also important to consider the cultural fit between your organization and the audit firm. Remember that they will likely interact with your board or finance committee, so there must be a positive connection. Establishing an ongoing relationship with your auditor, rather than a once-a-year engagement, will also make the process smoother. Regular communication and consultations, particularly around significant financial operations, can help prevent misunderstandings and issues down the line.
Audit Preparation: A Year-Round Process
Audit preparation is not a one-time event but rather a year-round process. By taking proactive steps throughout the year, such as adjusting grant revenue or organizing folders in Google Drive, you can significantly reduce the stress of preparing for the audit.
While audits may initially seem daunting, they offer a fantastic opportunity for improvement and growth if approached with the right mindset and preparation. By choosing the right auditor, building a solid relationship, and preparing year-round, audits can become a valuable tool for your organization’s growth.
Remember, each step you take toward a more efficient audit process is a step toward the growth of your organization. To further assist you in this journey, we have a resource for stress-free audit processes available for free. By signing up, you will gain access to a trove of information that can aid in navigating the audit process more effectively. This guide intends to change the narrative around audits and position them as a catalyst for growth and success in the nonprofit sector. Let’s turn audits from a source of dread into a tool for growth and prosperity.
Read the podcast transcripts here.
Links mentioned in this episode:
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